Along those lines, I'm planning to take a look at some different types of investments that many people aren't as familiar with, as well as the popular exchange-traded funds that allow you to make those investments. Today, I'd like to focus on preferred stocks in general and on the iShares Preferred Stock ETF(NYSE: PFF) in particular.

Why buy preferred stock?Novice investors often think preferred stock simply refers to shares of high-quality companies. But in actuality, preferred stock is a much different type of investment than regular common stock.

Preferred stock combines elements of both stocks and bonds. Preferred stock pays dividends that are usually higher than what common shareholders receive, and if a company goes under, they get paid before common shareholders get anything. But because their dividends are usually fixed, preferred stock doesn't have the growth potential that common shares offer.

You can buy individual preferred stocks on regular stock exchanges. But the benefit of the iShares ETF is that it aggregates more than 250 different preferred stocks into a single portfolio. That's part of the reason why the ETF has become so popular, with more than $10 billion in assets under management.

One concern about the ETF has to do with its concentration in financials. Wells Fargo(NYSE: WFC), Bank of America(NYSE: BAC), and Citigroup(NYSE: C) are just a few of the big financial firms you'll find regularly using preferred stock to get capital, and within the ETF, you'll find substantial exposure to banks, insurance companies, and other financials. Only a few issuers, such as Ford(NYSE: F), hail from outside the financial industry, and even in Ford's case, its extensive financing operation looks a lot like the lending portfolios you'll see at many major banks.

iShares Preferred Stock also comes with substantial costs. You'll pay annual expenses of around $48 for every $10,000 you invest, which isn't dirt cheap, although it's less than what most active mutual funds charge. But the income you'll get is substantial, with a $10,000 portfolio generating more than $550 in annual dividends.

Please stay tuned throughout the month for other informative articles covering a wide range of important topics. Let me also encourage you to take a look at the special website we've set up at InvestBetterDay.com. On Sept. 25, we're taking a day to celebrate the art of investing, and we encourage your participation. Take a look at the site now and get on the path to personal prosperity.

Author

Dan Caplinger has been a contract writer for the Motley Fool since 2006. As the Fool's Director of Investment Planning, Dan oversees much of the personal-finance and investment-planning content published daily on Fool.com. With a background as an estate-planning attorney and independent financial consultant, Dan's articles are based on more than 20 years of experience from all angles of the financial world.
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